2007. 4hi and low.
You probably have a command trac transfer case, which does not provide full time 4WD. Only the optional select trac transfer case provides full time 4WD.
The Command-Trac transfer case had four positions: 2-HI, 4-HI, Neutral, and 4-LO.
The Selec-Trac transfer case had five positions: 2-HI, 4-HI Part-Time, 4-HI Full-Time, Neutral, and 4-LO.
more detail (from the wiki http://en.wikipedia.org/wiki/Jeep_Liberty
The Liberty is available with either a part time Command-Trac or full time Selec-Trac transfer case. The Command-Trac transfer case has four positions: 2-HI, 4-HI, Neutral, and 4-LO. The lever is placed in 2WD HI for regular driving, this allows the two rear tires to receive power. The second position, 4WD HI, is used for driving on slippery or loose pavement. This position locks both the front and rear drive shafts together splitting engine power equally between all four tires. The third position, Neutral, disengages both drive shafts from the transfer case allowing the car to roll freely; this is used for towing behind another vehicle, for example. The last position, 4WD LO is used for situations in which there is very little traction. This position, like 4WD HI locks both the front and rear drive shafts together, and by using a lower gear ratio, allows for 2.72 times more torque (however, the speed is limited to around 25 MPH max). It should be noted that using 4WD HI or LO on dry pavement is hazardous to vehicle components, through drive line binding and wheel-hop.
The Selec-Trac transfer case has five positions: 2-HI, 4-HI Part-Time, 4-HI Full-Time, Neutral, and 4-LO. This transfer case is different from the Command-Trac transfer only in the extra 4WD HI Full-Time position. The 4WD HI Full-Time position adds the same traction benefits that the part-time 4WD setting offers, but features an open differential between the front and rear axles to allow the two axles to spin at independent speeds and eliminate drive line binding and wheel-hop. The down side of 4WD Hi Full-Time is that, due to the open differential between front and rear drive lines, at times the drive train will only deliever power to the front or the rear e.g. when the front of the vehicle has reached a high traction surface such as dry pavement and the rear is in sand, the rear tires will spin with 100% of engine power, the front receiving no traction. Under equal traction conditions (front-rear) this position gives the rear wheels 60% of the engine's power and the front wheels 40% of the engine's power. The division of power and open center differential allows the Selec-Trac transfer case to be operated at all times in an "All Wheel Drive" mode with no adverse effects.